“The planner in me says this kind of site is a premium site today, tomorrow, and forever, [but] the developer in me says there’s no way it’s going to pencil out,” says Daniel Gehman, a studio director based in the Orange County, Calif., office of Humphreys & Partners Architects.
Passing on Prime Sites
Many renters still want to live in bustling neighborhoods where they have access to mass transit and can walk to a grocery store or nice restaurant.
“Typically, renters are willing to pay more and stay in one place longer due to the convenience factors a good walkable location offers,” says Bob Thollander, vice president of development for the Florida region for The Bainbridge Cos.
The problem is, many of these locations now have too much supply. “In the early part of this cycle, the urban deals were first out of the box and tended to attract a lot of institutional investors and, as a result, major markets [tended to be overbuilt],” says Thollander.
As a result, some developers, including Cleveland-based NRP Group, are deciding not to build at many of these sites—at least for now. “It’s really hard to make the numbers work for [markets] that have already received that much supply,” says Travis Sheffield, NRP’s vice president of development, echoing Gehman’s sentiments. “We might take another look in two or three years.”
The cost of construction is also reaching new highs, adding to overall project costs. “The cost of land and the cost of construction are driving development out of the town centers and into the peripheral neighborhoods,” says Gehman.
Looking Farther Afield
Developers are still finding opportunities to build, but they’re often far from the major markets, downtown areas, and town centers they focused on earlier in the cycle. “There are many semi-urban and suburban markets that have previously been overlooked and which now are in the early to middle development stages,” says Thollander.
In late November 2017, NRP opened 314 new apartments at Main Street Lofts, located just outside of the historic downtown of Mansfield, Texas, an older suburb of Dallas that, until last year, had almost no rental apartments. Since then, eager renters have signed leases for more than half of the property’s units. That works out to a pace of more than 25 a month—a strong showing for any new apartment community, especially for the area around Dallas, where many submarkets are struggling to absorb new development.
Other developers are looking to suburbs with old, existing downtowns like Pomona, Calif. “There are a lot of towns like that, that have that little remnant of a downtown area … a lot of antique shops, maybe some restaurants,” says Gehman.
Others are finding new frontiers in cities such as Riverside and Sacramento, Calif., which have finally recovered enough from the Great Recession to support new development on a large scale. “There have been a few town-center developments that we proposed on recently,” says Gehman, including plans to enter a master planned town center in Las Vegas, which until relatively recently was still clearing away the wreckage from the housing crash.
“There’s some possibility that new large developments could emerge in late-to-the-party metros where achievable rents are just reaching the point to spur a bump in construction,” says Greg Willett, chief economist at RealPage.
Developers are also looking to secondary markets in the Midwest, where economic progress has been slower—albeit perhaps steadier—than on the coasts or in the Sun Belt. “Most markets across the Midwest could be considered as big-project candidates, simply because inventory growth in this cycle has been fairly tame, except in the urban cores of Chicago, Minneapolis, and Indianapolis,” says Willett.
Some of these markets, however, such as small Midwestern cities where rents have grown slowly over time, may be vulnerable to overbuilding before long. These areas may not have enough demand for rental apartments to support more than a few projects, even in their strongest submarkets.
“Given how long this market cycle has run, we’ve clearly done most of the comparatively easy development deals [already],” Willett says. “What’s getting going now often only barely pencils financially, and, in some spots, we’re deep into sites where the physical characteristics are challenging for some reason, or the specific location isn’t the best.”